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Fallacies of Economic Stimulus

Spending Ourselves Rich

Fallacies, like the aggregates that I discussed above, do not come in easily quantifiable sizes. But, if they did have sizes, the concept of economic stimulus would be one of the largest.

Many, including those who call themselves economists, suggest that getting people to spend more money on consumer items will stimulate economic growth. In the short term, getting consumers to spend more money does create more economic activity. But, that spending will not stimulate long-term economic growth. Quite the contrary, increasing consumption reduces savings which in turn reduces long-term economic growth.

Even worse, if the government takes action designed to increase consumer spending, it can only do so by taking resources from the savings pool, which will definitely retard long-term economic growth.

A lot more needs saying about this particular fallacy because of its mistaken popularity. I will address the importance of saving over consumption for the sake of long-term economic growth.

Aristotle

Aristotle

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Henry Hazlitt
Economics in One Lesson